3 Section 1: Snapshot SME Working Definition and Profile Less than 500 employees Represent 99% of all American companies Employ over 50 percent of private sector employees (about 120 million people) Generate 65 percent of net new private sector jobs Represent over half of U.S. non-farm GDP Vast majority are sole proprietorships Represent 98% of all U.S. exporters and 34% of U.S. export revenue

4 Section 1: Snapshot US Small Businesses by Number of Employees Source: US Census Bureau, 2013

10 Section 2: Environment Greater Perceived Risk Means Tighter Lending SME sales haven t returned to pre-recession levels, which in turn, means less demand for loan capital. Traditional collateral, primarily real estate, lost value during the crisis making some borrowers less creditworthy. Banks have remained more risk averse in the recovery while focused on integrating new regulatory oversight in their day-to-day operations. The resulting tighter lending criteria includes: Greater focus on borrower s personal profile, credit scores, income and assets Higher collateral requirements Increasing equity requirements for new loans Preference for liquid collateral, e.g. personal savings, CD s, or stock.

11 Section 2: Environment Banking Industry Consolidation The Banking industry has been in a state of perpetual consolidation since the mid-1980 s. Community Banks, the second leading source of SME bank loans, are being absorbed by larger banks. There are less than 7,000 today, down from over 14,000 in Smaller banks have traditionally relied on relationship banking which includes social context like the borrower s character and local community history in lending decisions. Relationship banking is expensive and don t translate well to the dataoriented criteria and automation used by larger banks.

12 Section 2: Environment Higher Transactional Costs Lenders face greater risk because SME s are inherently more sensitive to economic volatility, have higher failure rates, and fewer assets to collateralize. Publically available information on SME business and financial performance is fragmented and costly to obtain. The fragmented market makes it difficult to develop general credit standards and to securitize and sell small business loans in the secondary market. This state of operational and information disconnect has yet to be resolved and contributes to the higher transaction costs associated with small business lending. Consequently, transaction costs to process a $100,000 loan are comparable to a $1 million loan, but with less profit for lenders.

13 Section 2: Environment High Search Costs The current environment includes high search costs in which it s difficult for qualified borrowers to find willing lenders, and lenders to find creditworthy borrowers. A Federal Reserve study states SMEs can spend up to 25 hours on paperwork for bank loans, and often apply to multiple banks. Even successful applicants can wait several weeks before the funds are available.

14 Section 2: Environment Regulatory Oversight Bank management has been focused on the implementation of Dodd- Frank reforms and Basel III requirements in their processing and dayto-day operations. This regulatory overhang has been an ongoing issue during the recovery, has contributed to the lack of available funds for lending and a case can be made that there has been a disproportionately negative effect on SME lending in particular.

15 Section 2: Environment Stalemate and the SME Credit Gap In summary, Banks say there s a lack of demand and they re not finding qualified borrowers. Small business owners say that, despite being creditworthy, banks remain unwilling to lend to them Transaction costs to process a $100,000 loan are comparable to a $1 million loan, but with less profit to the lender; and yet these smaller loan amounts are generally needed most by startups and SMEs. The unstoppable force (small business need for capital) has met the immovable object (bank lending) resulting in the creation of an SME credit gap. And that gap is being filled by technology solutions and the emergence of online alternative finance.

17 Section 3: Alternative Finance Non-bank Balance Sheet Lenders Balance Sheet lenders make loans and keep them on their own balance sheet instead of packaging and selling off as securities. If the borrower defaults, balance sheet lenders take the borrowers' assets to cover the unpaid debt. Typical terms are less than 9 months and the proceeds are used for working capital. Repayment is made by a fixed amount or percent of sales deducted daily from the borrower s bank account over a period of months. Interest rates can range from 30% to 120% on an average loan size of $40,000. Preliminary market data: $5 billion in loans since 2007 Biz2Credit OnDeck Can Capital

18 Section 3: Alternative Finance Marketplace Lending Online marketplace lending allows borrowers to comparison shop for a range of loan products from a variety of lenders. Lenders can include commercial, community and regional banks and the SBA as well as other alternative lenders. Mitigates the high search costs for borrowers (~25 hours). Revenue generated from fees paid by the borrower if they get funded. Or the loan package is sold to a lender. Interest rates and loan terms are independent of the platform and determined by the lender. Boefly Fundera Lendio

19 Section 3: Alternative Finance P2P Lending and Crowdfunding Peer-to-peer/Person-to-Person and Crowdfunding platforms enable individuals, businesses, institutional investors and investment banks to lend to consumers and businesses for specific projects. Platform revenue comes from origination fees deducted from the loans disbursed to borrowers and servicing fees deducted from principal and interest payments paid to the lender. Value proposition: Lower interest rates for borrowers; attractive rates of return for investors; and a simple, web-based platform with lower operating costs than banks. Platform provides investors with the ability to distribute risk among multiple borrowers. Interest rates can range from 8% to 25% for loans up to $250,000 over three years. Preliminary market data: $4 billion in loans to date Lending Club Prosper.com Funding Circle

20 Section 4: Outlook for 2015 Outlook for 2015 Bank lending to SMEs has improved, but has not and likely will not return to pre-crisis levels. In June 2013, bank portfolio loan balances of $1 million or less was $288 billion down $47 billion from June Online alternative finance is currently generating about $10 billion in outstanding loan capital and these alternatives will continue strong growth in The outstanding portfolio balance of online alternative lenders is doubling every year. By contrast, outstanding loan capital held by the banking sector is declining an average of 3% annually.

21 Section 4: Outlook for 2015 Some Perspective on Alternative Finance Total SME Debt Capital Outstanding as of 2013 ($ Billions) 700 Bank Loans 175 Business Credit Card 140 Equipment Leasing SBA Factoring MCA Online Alternatives Source: Mills, Karen and Brayden McCarthy. State of Small Business Lending: Credit Access During the Recovery and How Technology May Change the Game. Harvard Business School. July 2014.

22 Section 4: Outlook for 2015 SME Exporters There are reasons for optimism a 2013 NSBA/SBEA survey shows that 60% of non-exporters are interested in exporting and 52% of current exporters report increased export sales since A 2012 Boston Consulting Group report forecasts that by 2020, declining energy costs and increasingly competitive wages will give America as large as a 25 percent export cost advantage over major exporting competitors like Japan and Germany. The BCG report estimates that the US will experience a manufacturing renaissance and re-shoring starting in 2015, and could add 2-3 million jobs and $100 billion in annual GDP.

23 Section 4: Outlook for 2015 Online Marketplaces Strong growth will continue in Currently Online platform providers generally use proprietary technologies to evaluate risk and creditworthiness. There will be increasing efforts in: Partnerships with third party agencies for data validation. Development of securitization and secondary market due to institutional demand. There are credible estimates for a potential market size of $870 Billion. This figure comes from a comparison to banks, credit cards companies and other lending institutions that generate over $870B/year in fees and interest over $3.2T in lending activity. Specialized segments will continue to grow in many areas of business and consumer lending. Segments like real estate, mortgage appraisal, education and healthcare etc. will continue to evolve.

24 Section 4: Outlook for 2015 Marketplace Investors Institutional debt and equity investors will continue to seek the relatively high rates of return. Traditional bank loans yield 5% to 7%, while many platforms are generating yields ranging from 30% to 120% of the loan value. These higher yields are particularly attractive in the current, and historic, environment of the Federal Reserve s Quantitative Easing that has kept yields low.

25 Section 4: Outlook for 2015 SME Banking Bank lending will likely never return to the pre-2008 environment. However banks currently own the asset marketplace lenders want the most - millions of SME customers. The Bank and Credit Card industry response to online alternatives will be interesting to watch. Some are already participating by: Using their capital to fund loans on marketplace platforms Taking a position in the platforms and offering as a value-added service. Assisting in the development of secondary market for trading and liquidity. A 2013 KPMG banking survey reports that banks have generally accounted for the new regulatory oversight and are now placing a renewed emphasis on a customer-centric business model and improvements to customer s technology experience, which in turn, will drive major investments over the next few years.

26 Section 4: Outlook for 2015 Big Data There will continue to be strong growth in the use of Big Data and development of scoring algorithms which integrate social data from, for example, blogs, product and business reviews and tweets. Online platforms generally recognize that integrating new sources of data is their competitive advantage. The key predictive goal is to establish a correlation with repayment. The more predictive the loan pool, the stronger the underwriting. A marketplace lender uses its own data in a feedback loop that increases the accuracy of its model. Loan performance data feeds back into the model, further increasing the accuracy. As the accuracy increases, the lender can offer lower rates to borrowers. As rates decrease, more borrowers come to the platform, driving more data into the model.

27 Section 4: Outlook for 2015 Regulatory Oversight Marketplace lenders fall between the cracks for federal regulators because they re not banking entities. Currently no single federal entity has broad authority to regulate the emerging industry. The majority of oversight happens at the state level, with a patchwork of regulations within state lines. The P2P platforms are a hybrid of lending (the domain of regulators at the state and federal level) and registered securities (the domain of the SEC). A key innovation of P2P lending is that lenders on the platform are not lending money to borrowers in the legal or regulatory sense; rather the lenders are investors in securities issued by the lending platforms linked directly to specific loans originated by an underlying bank. These and other regulatory issues will be developed in 2015.

28 Section 4: Outlook for 2015 Regulatory Oversight Key regulatory and policy issues to resolve: Define the appropriate level of regulation? Transparency and Disclosure between all parties in a transaction. Standardized Oversight and Monitoring by Federal and State regulators. Borrower financial awareness, literacy and education.

The Future of Small Business Lending: CREDIT ACCESS DURING THE RECOVERY AND HOW TECHNOLOGY IS CHANGING THE GAME LendIt USA Karen Gordon Mills Senior Fellow, Harvard Business School & Harvard Kennedy School

State of Small Business Lending: US and UK Karen Gordon Mills Senior Fellow, Harvard Business School & Harvard Kennedy School Former Administrator of the U.S. Small Business Administration and Member of

AS OF JULY 2014 STATE OF SMALL BUSINESS LENDING: CREDIT ACCESS DURING THE RECOVERY AND HOW TECHNOLOGY MAY CHANGE THE GAME Karen Gordon Mills Senior Fellow, Harvard Business School and Harvard Kennedy School

SME Banking-Africa A Unique Opportunity for the Continent Key Messages More to be done The opportunity Challenges in SME financing Profitable segment A proposed solution 2 SMEs in Africa- The Missing Middle

Lecture 4: The Aftermath of the Crisis 2 The Fed s Efforts to Restore Financial Stability A financial panic in fall 2008 threatened the stability of the global financial system. In its lender-of-last-resort

How Bankers Think Build a sound financial base to support your company for future growth Presented by: Lisa Chapman Business Planning, Social Media Marketing & SEO 615-477-8412 Questions to Consider First

JULY 2015 COMMENTARY Rapid Growth in Online Lending Prompts Information Request from U.S. Treasury The U.S. Treasury Department (the Treasury ) has issued a Request for Information ( RFI ) on online marketplace

Lorem Ipsum Funding the Cyclical Business Acquiring the necessary working capital a business needs to grow and thrive in an uncertain economic climate. A PublicATION 2 OVERVIEW This white paper will discuss

OLR RESEARCH REPORT February 19, 2013 2013-R-0054 ANALYSIS OF STATE SMALL BUSINESS LOAN GUARANTEE PROGRAMS By: Michelle Kirby, Associate Analyst You asked for an analysis of state small business loan guarantee

Financial System Inquiry SocietyOne Submission SocietyOne is pleased to make the following submission to the Financial System Inquiry. SocietyOne is Australia s first fully compliant Peer-to-Peer (P2P)

5 Interesting Facts about the Peer to Peer (P2P) Market 1 P2P is not crowdfunding PEER TO PEER LENDING CROWDFUNDING The practice of unrelated individuals or companies lending money directly to one another

Finance for Business Growth A Presentation by Clive Lewis, Head of Enterprise, Institute of Chartered Accountants in England & Wales (ICAEW) Finance for Growth Businesses Presentation will cover: Do you

PROJECT FINANCE With the growth in the economy and the revival in the industrial sector coupled with the increasing role of private players in the field of infrastructure, more and more Ethiopian banks

Supporting Statement for the Domestic Finance Company Report of Consolidated Assets and Liabilities (FR 2248; OMB No. 7100-0005) Summary The Board of Governors of the Federal Reserve System, under delegated

1 Regional Bank Regional banks specialize in consumer and commercial products within one region of a country, such as a state or within a group of states. A regional bank is smaller than a bank that operates

SMALL BUSINESS DEVELOPMENT CENTER RM. 032 FINANCING THROUGH COMMERCIAL BANKS Revised January, 2013 Adapted from: National Federation of Independent Business report Steps to Small Business Financing Jeffrey

Accounts Payable are the total amounts your business owes its suppliers for goods and services purchased. Accounts Receivable are the total amounts customers owe your business for goods or services sold

Two Harbors Investment Corp. November 4, 2015 Two Harbors Investment Corp. is proud to present a webinar titled: Mortgage Loan Conduit and Securitization. Periodic webinars from Two Harbors will provide

Development of the Corporate Credit Information Database and Credit Guarantee System Hachinohe University Research Institute, Japan; University of Malaya, Malaysia; De La Salle University, Philippines;

11-1 Introduction Financial contracts are made between lenders and borrowers Non-traded financial contracts are tailor-made to fit the characteristics of the borrower In business financing, the differences

Alternative Financing for Small Businesses - IBANYS June, 2015 Jim Conroy, Senior Vice President New York Business Development Corporation 1 About NYBDC NYBDC was formed in 1955 and is owned by banks Approximately

Risk Management Risk Control The ORIX Group allocates management resources by taking into account Group-wide risk preference based on management strategies and the strategy of individual business units.

How to Finance a Start-Up Business What are the steps and tools needed to finance your new business? How to Finance a Start-up Businessby Illinois worknet is licensed under a Creative Commons Attribution-Non-Commercial

Ipx!up!hfu!uif Dsfeju!zpv!Eftfswf Credit is the lifeblood of South Louisiana business, especially for the smaller firm. It helps the small business owner get started, obtain equipment, build inventory,

Background The loan servicing business is undergoing major scrutiny with operating, profitability including a run-away cost to service and regulatory compliance pressures. With the Dodd Frank legislation,

REAL ESTATE BASICS Affordability Analysis An analysis of a buyer s ability to afford the purchase of a home, reviews income, liabilities, and available funds, and considers the type of mortgage a buyer

State Small Business Credit Initiative Collateral Enhancement Program Ohio Capital Access Program Targeted Investment Program The State of Ohio is an Equal Opportunity Employer and Provider of ADA Services.

Athens University of Economics and Business MSc in International Shipping, Finance and Management Corporate Finance George Leledakis An Overview of Corporate Financing Topics Covered Corporate Structure

The Economic Impact of OnDeck s Lending Prepared by Analysis Group November 17, 2015 1 I. Executive Summary Small businesses account for nearly half the economic output and employment of the U.S. economy,

Financial Planners & Registered Investment Advisors MarketPlace Finance A Wealth Accelerator For High Net Worth Clients 1 What is Crowdfunding? The practice of funding a project or venture by raising small

Note: This notice has been submitted to the Office of the Federal Register (OFR) for publication and is currently scheduled for placement on public display at the OFR on Friday, July 17, 2015 and publication

Dodd-Frank: What About Leasing? October 2011 By Paul Bent Part Two of a Two-Part Article Part One of this two-part article provided an overview of the Dodd-Frank Wall Street Reform and Consumer Protection

The Credit Decision 信 用 决 策 1-15 Credit Risk Credit risk is the probability that a borrower will not pay back a loan in accordance with the terms of the credit agreement. The risk can result from: Default

SCORE Counselors to America s Small Business SMALL BUSINESS START-UP FINANCING OVERVIEW One key to a successful business start-up and expansion is your ability to obtain and secure appropriate financing.

Banks in Canada Helping our Small and Medium-sized Enterprises Grow and Succeed October 2013 Overview Small and medium sized enterprises (SMEs 1 ) are a vital part of the Canadian economy and, as a result,

ACCESS TO FINANCE Improving access to finance is essential to restoring growth and enhancing competitiveness. Investment and innovation are not possible without adequate financing. Difficulties in accessing

BUSINESS PLANS A business plan is absolutely essential to the creation of a new business entity as well as the continued profitable operation of an established business. The conduct of a business in the

LEADING AS A DEVELOPMENT BANK An Introduction to BDC Michel Bergeron, Senior Vice-President, Marketing & Public Affairs November 6, 2012 December 2010 1 Most Canadian employer firms are small Distribution

Ⅰ Basic Structure of Real Estate Securitization [ 1 ] Securitization and Monetization Asset securitization is where a financial institution or other business that owns assets places those assets in a structure

ERC Insights June 2014 FINANCING GROWTH Recent ERC research provides new insights into bank borrowing among UK SMEs and emphasises the potential value of effective company boards in helping firms to access

Wealth for Life Glossary Aggressive growth fund: A mutual fund that aims for the highest capital gains. They often invest in smaller emerging companies that offer maximum growth potential. Adjustable Rate

STATE SUPPORT FOR SMALL BUSINESS LENDING: A Roadmap for North Carolina October 2014 Introduction Small businesses are the economic engines of our state and local communities. In North Carolina, businesses

Table 2 SENIOR LOAN OFFICER OPINION SURVEY ON BANK LENDING PRACTICES AT SELECTED BRANCHES AND AGENCIES OF FOREIGN BANKS IN THE UNITED STATES 1 (Status of policy as of April 2003) Questions 1-5 ask about

Financing Options for Your Small Business Show me the money! Purpose: Commercial Financing Basics Potential Methods of Commercial Finance Overview of U.S. Small Business Administration Key Lending Programs

A Account A record of a business transaction. A contract arrangement, written or unwritten, to purchase and take delivery with payment to be made later as arranged. Accounts payable Money which you owe

Corporate Financing Strategies For Emerging Companies What is Corporate Finance? The process by which companies raise capital, especially to fund growth, acquisitions etc. The primary goal of corporate

Business Financing An Article by Michael L. Messer and Thomas L. Hofstetter SCHENCK, PRICE, SMITH & KING, LLP Even in these challenging economic times, businesses still have a need to grow and to obtain

Business Plan Guidelines The following Business Plan Format checklist is meant as a guideline only listing the most important sections of the business plan in the order in which they will likely appear